Unlike some countries where they have a progressive, Australia has a single tax rate for corporate income. This simplifies tax collection for most part. However, the country does provide some breaks for small companies. Unlike personal income tax, there is no tax-free threshold for businesses, no matter how small.
Lower Tax Bracket
The full corporate tax rate is 30% but there is a break for small companies and base-rate entities, which is 27.5%. The full corporate tax rate applies to companies, corporate unit trusts and public trading trusts. There are two types of companies which pay the lower rate:
- Base-rate entity based on the 2017-18 income year; and
- Small business entity for 2015-16 and 2016-17 income years.
The current (2017-18, up to 2019-20) 27.5% tax rate for base rate entities will further decrease to 26% in 2020-21, and then to 25% for the 2021-22 income year. The tax rate for all other companies will remain at 30% during the period. These will apply to base rate entities with aggregate turnover of less than $50 million during the 2018-19 income year.
Base Rate Entity
A company is categorized as a base-rate entity if it has:
- less than the aggregated turnover threshold of $25 million for income year 2017-18;
- 80% of of their income is considered base-rate entity passive income, which is defined as any of the following:
- royalties and rentals;
- interest income (with exceptions);
- gains on qualifying securities;
- net capital gain;
- corporate distributions and their franking credits;
- an amount of money which is part of the assessable income of a partner (if in a partnership), or trust beneficiary, that is directly or indirectly traceable to monies which are base rate entity passive income.
Small Business Entity
During the 2015-16 and 2016-17 income years, a small business entity company was a requirement for a lower tax rate. The company tax rate was 28.5% for small business entities in 2015-16. They also had to have an aggregate turnover of less than $2 million, as well as conducting a business at least for part of the year.
For the 2016-17 income year, the rate was 27.5%. Small businesses needed to have both:
- an aggregate turnover of less than $10 million; and
- are conducting business operations for at least part of the year.
The rules changed for the 2017-18 income year and onwards, where the lower tax rate was applicable for companies which were base rate entities, instead of small business entity.
Not-for-profit companies have a graduated tax rate. There is no tax on the first $416 of the taxable income. For taxable income between $417 up to $832, the tax rate is 55%. For incomes of $833 and above, the tax rate is 27.5%. The tax rate is only allowed for base rate entities from the 2017-18 income year; and for small business entities for the 2016-17 income year.
The Australian tax structure has been simplified and continues to include improvements on its tax collection. With the base rate entity, small companies and not-for-profits have a lower tax rate. The tax rate will also decrease for the coming years. Having a flat rate not only simplifies the computation of the taxes due, but also helps small companies and not-for-profit to make have a sizable income.